Understanding Risk Contracts

Posted October 20, 2022 by in Lifestyle
contracts and hands

Risk contracts are payment models that define the financial relationship between a primary care provider (PCP) and the insurer. They first came into existence when the Medicare Improvements for Patients and Providers Act (MIPPA) was passed in 2008. Ever since then, Fee-For-Service (FFS), or incentive-based contracts are slowly being faded out of the medical insurance market in the US. As the transition has reached its peak now, a better understanding of how risk contracts work is essential.

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Risk Contract: The Payment Model

A risk contract is also called a value-based contract because the insurance plan pays/reimburses PCPs based on estimated values of the medical services provided to the patient. They were devised with the primary goal of assigning more accountability to primary care providers regarding:

  • The quality of medical care that is provided to each separate patient.
  • Patient readmission rates.
  • The maximum budget per patient.

If It’s a risk contract, then the primary care providers must treat each patient only within the maximum budget allowed by the patient’s insurance plan. If the PCP ends up exceeding that pre-allocated budget, the PCP will need to pay for the additional expenses on their own.

There Are Different Types of Risk Contracts

Although there are several variations of the risk contract’s core payment model, they can all be summarized under three main categories:

  1. Risk Contracts
  2. Shared Risk Contracts
  3. Full Risk Shared Contracts

Risk Contracts

A risk contract is essentially the same concept already discussed above, in its simplest form. If the primary care provider ends up treating a patient beyond what he/she is insured for, then the primary care provider will be held financially responsible for paying the excess medical expenses.

Shared Risk Contracts

In a shared risk contract, the financial risks of exceeding the budget and having to pay for the excess expenses are shared partially or to a predefined financial extent, by at least two parties. It’s the more practical choice of course, given that the financial burden of having to pay for the patient’s treatment beyond budget is no longer the sole responsibility of the PCP.

Full Risk Shared Contracts

Full risk sharing uses the same concept as the shared risk contracts explained above, but it goes beyond just partial or limited financial risk sharing. It’s not uncommon to find that the patient’s insurance plan does not have a budget big enough for them to receive the care they need. If the PCP ends up going past that allocated budget in order to bring relief to a patient, the full cost of those extra expenses will be shared by two or more parties. That is essentially the gist of how shared full risk contract healthcare plans work.

As one can imagine, risk contracts or value-based reimbursement plans are also subject to a lot of scrutiny, since there are both drawbacks and advantages to them. The risk of having to pay for their patient’s medical care will often force PCPs to lower the quality of their care and equipment, just to meet the budget. On the other hand, it allows less room for excess billing, which is almost a norm in FFS contracts.